Friday, February 22, 2013

Realty Income Added to Portfolio

Realty Income Corporation (O) was added to the portfolio in February. Realty Income is a 44-year-old real estate investment trust, with over 3,500 commercial properties in 49 states, diversified across 44 industries and 150 companies. A majority of the properties are retail, with the greatest revenues coming from convenience stores, chain restaurants, movie theaters and health and fitness industries. The leases generally are "triple net," which means the tenant pays for the taxes, maintenance and insurance on the property.

Realty Income was a previous long term holding. I sold it in June, 2012 when it reached $37.80. The yield at that time was 4.6%, but by comparison the yield of National Retail Properties (NNN) was 5.9% and I thought O was a little ahead of itself.

Sometimes when you sell a stock you feel nothing but relief. Sometimes when you sell a stock, you feel like you're missing part of the family. For the past few months I've been waiting for a pullback in Realty Income, looking for a new "entry point." Last fall, Realty Income announced a merger with American Realty Capital Trust, Inc. As a result of the merger, in January, 2013, Realty Income announced a 19.2% increase in its monthly dividend, from $.15175 to $.1809167. This raised the annual dividend from $1.821 per share to $2.171. It also brought Realty Income's dividend yield back into the 5% range. As of February 21, NNN's yield was 4.7% and O's yield was 4.9%.

The target allocation for Realty Income is 4% of the portfolio. Two other triple-net REITs in the portfolio are NNN and WP Carey (WPC), with a target allocation of 4% each.

Realty Income's excellent website provides a wealth of information. Since 1969, the company's mission has been "to provide our shareholders with dependable monthly dividends that increase over time." The company has seven core principles:

1. Acquire properties for cash
2. Own properties with leases already in place that can consistently pay rent
3. Own properties that are critical to the generation of the revenue of the tenants
4. Hold the properties for long-term income production
5. Generate an enduring stream of lease revenue to pay monthly dividends
6. Maintain a strong financial position with adequate liquidity
7. Staff our company with employees committed to our mission.

Realty Income's 52-week price range has been $36.34 to $45.00. The closing price on February 21, 2013 was $44.30. Ordinarily, I would not purchase a stock this close to its 52-week high, but the merger with American Realty Capital Trust and the subsequent 19% dividend increase puts the 52-week price range in a new light.

From the company's website:
Adjusted Funds from Operations for 2012 were $2.06 per share, up from $2.01 in 2011.
Net Income for 2012 was $.86 per share, down from $1.05 in 2011.
Dividends paid in 2012 were $1.772 per share, up from $1.737.

The property occupancy rate was 97.2% in 2012 and 96.7% in 2011.

Realty Income has increased its dividend each year since 1995.

This is not a recommendation to buy Realty Income, but a suggestion for a stock to study. Everyone's situation is different. Do your own due diligence.

About Me

Semi-retired individual investor and member of the National Association of Investment Clubs since 1982, managing a model portfolio of stocks with these characteristics: Growth, Value and Income (GROVALINC), represented by growth of earnings and dividends, purchased at a price lower than its average price/earnings ratio.